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Research: Consumer
Rank Group
Written by
Rank Group |
Likely to be H2 weighted |
AGM trading statement |
Travel & leisure |
14 October 2016 |
Share price performance
Business description
Next events
Analysts
Rank Group is a research client of Edison Investment Research Limited |
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Rank has reported flat revenue for the first 15 weeks, against a strong 2015 comparative. Mecca digital has just been relaunched, supported by a new TV campaign, and better cross-sell remains a key opportunity for Rank. We expect profits to be H2 weighted, and with a slightly uncertain consumer outlook we have trimmed full year estimates, but Rank remains strongly cash generative. This underpins its progressive dividend payout and leaves it flexible to take advantage of acquisition opportunities.
Year |
Revenue* (£m) |
EBITDA* |
PBT* |
EPS* |
DPS |
P/E |
Yield |
06/15 |
738.3 |
126.3 |
74.1 |
14.6 |
5.6 |
13.9 |
2.8 |
06/16 |
753.0 |
128.2 |
77.4 |
15.4 |
6.5 |
13.2 |
3.2 |
06/17e |
777.0 |
130.0 |
78.5 |
15.6 |
7.1 |
13.0 |
3.5 |
06/18e |
800.0 |
137.5 |
86.0 |
17.1 |
8.5 |
11.9 |
4.2 |
Note: *Revenue is before customer incentives. **Normalised, excluding amortisation of acquired intangibles, one-off and exceptional items.
A flat start to the year
L-f-l revenue for the 15 weeks to 9 October grew by 1%, with total revenues flat. Grosvenor venues in particular faced a tough comparative, with l-f-l revenue down 1% versus a 2015 period that grew by 10% (helped by a strong win margin). Mecca venues’ flat l-f-l was a solid performance. Grosvenor digital’s 30% growth (off a small base) was partly offset by Mecca digital (-4% as expected, due to the platform migration disruption), leaving overall digital revenues up 7%.
Mecca digital now relaunched
Mecca bingo has now revamped its online and mobile offering, with a new front end and more games. The next six months are an important proving period, with competitors such as Gala Bingo, Jackpot Joy and Stride Gaming all reporting good growth, suggesting that the market remains vibrant, at least for the larger players.
Revisions to estimates
With added cost pressures in FY17 (Living Wage, rent reviews), we expect flattish H117 revenues to translate into slightly lower profits. By contrast, we expect H217 to show c 10% growth as Grosvenor venues face easier comparatives and digital gathers momentum. However, we now allow for a weaker outlook for leisure spending in our forecasts and have reduced our FY17e normalised PBT by £3m (3.7%) to £78.5m.
Valuation: 2016e EV/EBITDA only 6.4x
Rank’s 2016e (calendar) EV/EBITDA is now only 6.4x compared with a peer group average of 10.9x. Exposure to UK leisure spending should be balanced against its fully regulated status and our SOTP is 250-295p. News of positive progress at Mecca digital with the interims on 26 January would be a positive catalyst.
Trading statement
Rank’s AGM statement was relatively brief. Grosvenor Casinos’ venue l-f-l revenues were reported to have declined by 1% due to a lower average margin and lower customer visits. We believe that both London and the provinces were slightly lower, mainly due to a lower number of visits by leisure customers. With monthly fluctuations it seems too early to tell whether this is a trend, particularly since it compares with a very strong 15-week period in 2015 when Grosvenor l-f-l revenues increased by 10%.
Grosvenor digital revenues increased by 30%, as we expected. The new Bede platform appears to be performing well and the product offering has been improved with the addition of sports betting (supplied by Kambi and soft-launched in time for the UEFA Euro 2016 in June).
Mecca venues’ l-f-l revenues are reported to be flat, a solid performance for the mature but highly cash-generative business. We believe that spend per head has continued to increase slightly, offsetting lower visits.
We have discussed the disruption to Mecca digital’s platform migration in previous notes (see our Update report dated 23 August). It is about six months behind target in terms of functionality and, in a competitive marketplace, revenue declined by 4% in the 15 weeks to 9 October. However, Rank has now relaunched its website and mobile offering and begun marketing ahead of the important winter period (including a new TV ad with the strapline ‘We know the feeling’). The interim results on 26 January should provide an important guide to its ability to gain traction and capitalise on its strong brand and cross-sell opportunity.
Updated estimates
Exhibit 1 shows our new divisional estimates and Exhibit 2 our changes to estimates:
Exhibit 1: Divisional analysis
Year to June £m |
FY15 |
FY16 |
FY17e |
FY18e |
Analysis of revenue: |
||||
Grosvenor venues |
401.1 |
408.1 |
415.4 |
421.4 |
Grosvenor digital |
22.3 |
30.5 |
39.7 |
49.6 |
Grosvenor |
423.4 |
438.6 |
455.0 |
471.0 |
Mecca venues |
224.4 |
221.5 |
219.0 |
216.3 |
Mecca digital |
65.2 |
66.2 |
72.8 |
81.2 |
Mecca |
289.6 |
287.7 |
292.0 |
297.5 |
Enracha revenue |
25.3 |
26.7 |
30.0 |
31.5 |
Group revenue* |
738.3 |
753.0 |
777.0 |
800.0 |
EBITDA |
126.3 |
128.2 |
130.0 |
137.5 |
EBITDA margin % |
17.1% |
17.0% |
16.7% |
17.2% |
Depreciation/amortisation |
(42.3) |
(45.8) |
(47.0) |
(47.5) |
Grosvenor venues op. profit |
63.4 |
60.9 |
63.5 |
65.5 |
Grosvenor digital op. profit |
3.1 |
5.3 |
7.5 |
10.0 |
Grosvenor operating profit |
66.5 |
66.2 |
71.0 |
75.5 |
Mecca venues op. profit |
28.9 |
32.9 |
29.0 |
29.0 |
Mecca digital op. profit |
14.1 |
8.6 |
7.0 |
11.0 |
Mecca operating profit |
43.0 |
41.5 |
36.0 |
40.0 |
Enracha operating profit |
2.6 |
3.6 |
4.1 |
4.5 |
Central costs |
(28.1) |
(28.9) |
(28.1) |
(30.0) |
Group operating profit (norm) |
84.0 |
82.4 |
83.0 |
90.0 |
Source: Rank Group accounts, Edison Investment Research
We are not publishing detailed H117 estimates, but we assume that revenues will be only slightly ahead of last year’s £374m, while margins will be affected by higher costs in both Grosvenor and Mecca (Living Wage, rent reviews). Mecca digital’s profits will also have been affected by the delay in the full site relaunch. Overall, we expect H117 group operating profit of c £37m (H116: £40m) and H116 normalised PBT of £34.5m (£37.4m), with some benefit from lower interest charges.
By contrast, we expect a much stronger profit performance H217, with operating profit of c £46m (H216: £40m). Our forecast growth all arises in Grosvenor, with digital margins widening as it scales up and venues having a much easier comparative in Q4. We expect Mecca profits to remain under pressure with increased marketing to rebuild the digital business, which should then pay off in FY18. Overall, we now allow for a weaker outlook for leisure spending in our forecasts and have reduced our FY17e normalised PBT by £3.0m (3.7%) to £78.5m, with a similar reduction for FY18.
Exhibit 2: Changes to forecasts
EBITDA (£m) |
PBT (£m) |
EPS (p) |
|||||||
Old |
New |
% chg. |
Old |
New |
% chg. |
Old |
New |
% chg. |
|
FY17e |
133.0 |
130.0 |
-2.3 |
81.5 |
78.5 |
-3.7 |
16.2 |
15.6 |
-3.7 |
FY18e |
141.5 |
137.5 |
-2.8 |
90.0 |
86.0 |
-4.4 |
17.9 |
17.1 |
-4.5 |
Source: Edison Investment Research
Exhibit 3: Financial summary
£'m |
2014 |
2015 |
2016 |
2017e |
2018e |
||
June |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
707.7 |
738.3 |
753.0 |
777.0 |
800.0 |
Cost of Sales |
(409.2) |
(414.2) |
(427.1) |
(444.3) |
(457.2) |
||
Gross Profit |
298.5 |
324.1 |
325.9 |
332.6 |
342.8 |
||
EBITDA |
|
|
116.0 |
126.3 |
128.2 |
130.0 |
137.5 |
Operating Profit (before amort. and except.) |
72.4 |
84.0 |
82.4 |
83.0 |
90.0 |
||
Intangible Amortisation |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Exceptionals |
(46.5) |
2.1 |
9.3 |
0.0 |
0.0 |
||
Operating Profit |
25.9 |
86.1 |
91.7 |
83.0 |
90.0 |
||
Net Interest |
(9.9) |
(9.9) |
(5.0) |
(4.5) |
(4.0) |
||
Other finance adjustments* |
(1.6) |
(1.7) |
(1.1) |
0.0 |
0.0 |
||
Profit Before Tax (norm) |
|
|
62.5 |
74.1 |
77.4 |
78.5 |
86.0 |
Profit Before Tax (FRS 3) |
|
|
14.4 |
74.5 |
85.6 |
78.5 |
86.0 |
Tax on norm PBT |
(13.9) |
(17.0) |
(17.4) |
(17.7) |
(19.4) |
||
Profit After Tax (norm) |
48.6 |
57.1 |
60.0 |
60.8 |
66.7 |
||
Profit After Tax (FRS 3) |
0.5 |
57.5 |
68.2 |
60.8 |
66.7 |
||
Average Number of Shares Outstanding (m) |
390.7 |
390.7 |
390.7 |
390.7 |
390.7 |
||
EPS - normalised (p) |
|
|
12.4 |
14.6 |
15.4 |
15.6 |
17.1 |
EPS - (IFRS) (p) |
|
|
5.2 |
19.1 |
18.2 |
15.6 |
17.1 |
Dividend per share (p) |
4.50 |
5.60 |
6.50 |
7.10 |
8.50 |
||
Gross Margin (%) |
42.2 |
43.9 |
43.3 |
42.8 |
42.8 |
||
EBITDA Margin (%) |
16.4 |
17.1 |
17.0 |
16.7 |
17.2 |
||
Operating Margin (before GW and except.) (%) |
10.2 |
11.4 |
10.9 |
10.7 |
11.3 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
613.3 |
607.2 |
614.1 |
638.0 |
643.0 |
Intangible Assets |
390.2 |
395.7 |
404.3 |
410.0 |
415.0 |
||
Tangible Assets |
217.5 |
204.0 |
202.0 |
220.0 |
220.0 |
||
Deferred tax/other |
5.6 |
7.5 |
7.8 |
8.0 |
8.0 |
||
Current Assets |
|
|
87.9 |
123.4 |
100.5 |
83.5 |
96.0 |
Stocks |
3.1 |
2.8 |
2.9 |
3.5 |
4.0 |
||
Debtors |
37.7 |
31.0 |
36.6 |
40.0 |
44.0 |
||
Cash |
47.1 |
89.6 |
61.0 |
40.0 |
48.0 |
||
Other |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Current Liabilities |
|
|
(168.4) |
(309.4) |
(173.9) |
(187.5) |
(190.0) |
Creditors (incl provisions) |
(164.0) |
(184.5) |
(159.5) |
(167.5) |
(170.0) |
||
Short term borrowings |
(4.4) |
(124.9) |
(14.4) |
(20.0) |
(20.0) |
||
Long Term Liabilities |
|
|
(290.5) |
(126.8) |
(188.1) |
(141.0) |
(94.0) |
Long term borrowings |
(179.7) |
(17.6) |
(87.8) |
(56.0) |
(32.0) |
||
Other long term liabilities |
(110.8) |
(109.2) |
(100.3) |
(85.0) |
(62.0) |
||
Net Assets |
|
|
242.3 |
294.4 |
352.6 |
393.0 |
455.0 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
55.0 |
146.6 |
110.2 |
121.2 |
134.5 |
Net Interest |
(8.1) |
(7.5) |
(5.0) |
(4.5) |
(4.0) |
||
Tax |
(19.1) |
(2.2) |
(31.1) |
(15.7) |
(17.2) |
||
Capex |
(44.3) |
(31.9) |
(52.7) |
(65.0) |
(47.0) |
||
Acquisitions/disposals |
0.3 |
(1.0) |
16.2 |
0.0 |
0.0 |
||
Financing |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Dividends |
(16.4) |
(18.6) |
(22.7) |
(26.6) |
(30.9) |
||
Net Cash Flow |
(32.6) |
85.4 |
14.9 |
9.4 |
35.4 |
||
Opening net debt/(cash) |
|
|
104.1 |
137.0 |
52.9 |
41.2 |
36.0 |
HP finance leases initiated |
(2.3) |
(3.1) |
(2.8) |
(3.0) |
(3.0) |
||
Other |
2.0 |
1.8 |
(0.4) |
(1.3) |
(0.4) |
||
Closing net debt/(cash) |
|
|
137.0 |
52.9 |
41.2 |
36.0 |
4.0 |
Source: Rank Group, Edison Investment Research. Note: *Unwinding of discount on disposal provisions, other financial gains and losses.
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